The Bumpy Road of Mortgages

A few years ago banks would give a loan to just about anyone that applied for one – the rules were lax or non-existant.  You could get a loan by just stating your income and without verifying that was in fact what you earned!  Many other loans were made with no documentation from the borrower whatsoever.  While these types of loans were nice for the self-employed and others who have difficulty proving their earnings, they became known as “Liar Loans” because they almost asked the consumer to lie so they could qualify for a bigger, better house.

So now we’re seeing short sales and foreclosures everywhere.  People just got themselves in too deep to dig out.  If they needed to sell, prices dropped well below what they owed.  When they lost a job, all of a sudden that house payment was too much to handle.  Or sometimes it was an adjustible rate mortgage that adjusted to way more than they could pay.

What does all this mean to us today? It means that the underwriters who approve loans for mortgages have become very, very careful and the standards have tightened up to such a point even well qualified buyers can have difficulty getting financing, or conditions are put on loans at the last minute that delay settlement until they can be met.

Consider:

1. Credit Scores (FICO) – in 2006 you could get into a home with a 680 FICO score.  Today the magic number is 740.  Loans are made if credit scores are lower than this, but they come at a hefty cost in interest rate, or points.

2. Anything that looks “iffy” can send loan approval into a tizzy – underwriters are scrutinizing everything – each deposit into your bank account, withdrawals, and anything else that catches their eye.  Loan officers have to verify, re-verify and verify again.  Soon Fannie Mae and Freddie Mac loans will require the lender to run the borrower’s credit score 3 days before settlement – better hope that score didn’t dip too far in the 30-60 days from loan application!

3. Lending guidelines are changing so fast that lenders can’t keep up with them.  If a buyer was considering a particular loan a month ago, it may no longer be available, or the parameters have changed to a point they would no longer be able to get that loan.  Sometimes these changes happen the day of settlement – end result: no loan, no closing, no house!

4. Condos and any attached home (townhome, rowhome, duplex) that is part of a PUD (Planned Unit Development) that has an HOA or Condo Association has additional requirements that must be met before the loan is funded.  While all of this is certainly do-able, it just makes the process longer and more arduous.

5. Appraisals can be tricky after the Home Valuation Code of Conduct changed how appraisals are ordered and completed. Most lenders still use a company that employs appraisers who are knowledgeable in their region, however, once and awhile an appraisal will come in way under where it should be – for whatever reason – and that can derail a purchase.  Other times the appraiser will tag repair items in the home that must be completed before the buyer can get their loan (mostly with FHA and VA loans).

About now you’re probably thinking “no one can buy a home!”  But that isn’t true.  It’s definitely harder now and there are a few more hurdles to clear, but people get loans and buy houses all the time.  They have great credit (over 740 FICO), have a small amount of debt, have stable employment, and are bringing some cash to the table for the down payment.

But the most important thing they have is a good Realtor® to guide them through the hoops to home ownership.